27 January 2012 5:46 PM

“Stephen Hester’s bonus: A defence”

The fury surrounding Stephen Hester’s bonus moves us one step closer to a pitch-fork wielding lynch mob and one step further away from a rational debate about reform of the banking system.

Seemingly, everyone­ from the Taxpayers Alliance to the Occupy Movement through to the mayor of London – has taken to the airwaves to express their fury or bewilderment with the £963,000 awarded in shares, to the Royal Bank of Scotland chief executive.

How can this man deserve a single penny? Hasn’t the share price of RBS fallen rather dramatically this year? Isn’t Mr Hester effectively a public servant who should be carrying out his role out of a mixture of patriotic pride and civic duty rather than for a very substantial wedge of cash?

The facts, it seems, are not being allowed to get in the way of a good story.

Stephen Hester has the unenviable task of returning the RBS to a fully functional state before the government divests itself of its shares and the bank is returned to the private sector. All taxpayers and all those who receive any sort of funding from the state should wish him well in achieving this. By most accounts, Mr Hester is doing well. Not perfectly – that’s why he wasn’t given the maximum possible bonus for which he was eligible. But he’s done pretty well nonetheless. All RBS assets are now profitable – with the exception of Ulster Bank – and he has successfully reduced the balance sheet by hundreds of billions.

The shares he’s been given can’t be cashed in until 2014, so the actual value of his bonus is attached to the performance of the bank over the medium term. He may end up cashing in his shares for considerably more than today’s market value or for considerably less – that will depend on RBS’s future performance. Those arguing that any bonus he receives should be determined by today’s share price are embracing the short-term approach to remuneration which is often blamed for getting us into this mess in the first place.

If by his actions over the coming months and years, Mr Hester is able to ensure that the overall market value of RBS is just a few percentage points higher than it would otherwise be, he will have performed a most valuable service – potentially saving the British taxpayer hundreds of millions of pounds.

At present, Stephen Hester is being paid about the same as a middle grade Premiership footballer. There is little doubt that he could earn more money elsewhere and there is some very genuine concern that were he to leave, RBS would suffer badly. Those camped outside St Paul’s cathedral may take the view that they could do the job better themselves on the national average wage. But this is – to put it very mildly – deeply questionable.

Similarly, when the bank was effectively nationalised, the then Labour government could have chosen to run the bank directly from Whitehall. Wisely, they decided not to. The politicians – Ed Miliband was a Cabinet minister at the time – determined the governance mechanism for the RBS and are now second-guessing its decisions. If they wanted bonuses to be set by the Cabinet Office, why didn’t they set up such a structure at the time?

In tough economic times, when household budgets are stretched, it’s easy to become resentful of those earning eye-watering sums of money. But we shouldn’t let that distract from the vital need to restore the failed banking sector to health and to put in place the mechanisms to ensure a taxpayer bailout will not be needed again.

Share this article:

Comments

You can follow this conversation by subscribing to the comment feed for this post.

Post a comment

Comments are moderated, and will not appear on this weblog until the moderator has approved them. They must not exceed 500 words. Web links cannot be accepted, and may mean your whole comment is not published.

MARK LITTLEWOOD

Mark Littlewood is Director General of the Institute of Economic Affairs. He was educated at Balliol College, Oxford, where he read Philosophy, Politics and Economics.

He went onto study at City University Law School. Since 1995, Mark has worked in political communications, public relations and public affairs – variously for the European Movement, the Environment Agency and the London Bus Initiative.

In 2001, he became Campaigns Director for the human rights group Liberty, leaving in 2004 to found NO2ID, the group which opposes identity cards and the database state, and became its first national co-ordinator.

From December 2004 to May 2007, Mark was Head of Media for the Liberal Democrats. In 2007, Mark co-founded Progressive Vision, a classical liberal think tank and was its Communications Director until November 2009.